When it makes sense to opt into a state pension: Decisions to leave Serps may need to be reversed as people grow older. Andrew Bibby reports

EMPLOYEES who have contracted out of the State Earnings Related Pension Scheme (Serps) into a personal pension must move quickly if they want to opt back in for the current tax year.

The opt-out decision is in effect an annual one, rather than a once- and-for-all affair, and many people may now benefit financially from moving back under the Serps umbrella. In order to opt back for 1993/94, form APP2 must be sent to the Department of Social Security before 5 April - which in practice means before the Easter holiday.

Unfortunately, insurance companies and advisers are offering conflicting advice to their policyholders about what is described as the pivotal age - the point at which people are ill-advised to opt out or well-advised to return to Serps.

For example, Prudential, which is putting 20,000 customers back into Serps this year, calculates that women aged 42 and men aged 49 would be better off in Serps. Standard Life puts the pivotal age at 43 for women and 48 for men. Sun Life chooses ages 42 and 49 and Legal & General 40 and 45. Norwich Union goes even lower, at 37 and 45.

Peter Reeds, who had his 49th birthday last month, has just decided to rejoin Serps after about three years with a Scottish Equitable pension plan. 'I was 45 when I contracted out, and my adviser told me I was borderline then. He wrote last December, and based on what he said, the case for returning to Serps really made itself,' he said.

Employees have the right to leave and re-join Serps as they wish, and their appropriate personal pension - the term given to a plan that replaces Serps - should be set up so there are no exit penalties for ceasing to make contributions.

Mark Duke, a partner at the consulting actuaries Towers Perrin, says the principle in contracting out is the same as in the decision to transfer from a company scheme to a personal pension. 'In each case, you are giving up defined benefits to join a money purchase scheme.'

In other words, the size of the retirement income from an appropriate personal pension depends on future investment performance and on the prevailing annuity rate at retirement. Since women live on average longer than men, they require a larger pool of money in a personal pension, so are better advised to return to Serps at a younger age.

Choosing between Serps and a personal pension involves making additional assumptions about future salary increases and career prospects, national insurance rates and government policy. It also depends on the level of earnings. 'The lower your pay, proportionately the more you lose by way of expenses,' said Mr Duke.

Lautro, the regulatory body for insurance companies, has told its member firms to inform those clients who would benefit from rejoining Serps, but it has allowed them to devise their own way of calculating the pivotal ages.

People who bought their appropriate personal pensions through independent advisers will not necessarily be notified.

Individuals who have contracted out of Serps via a personal pension continue to pay full national insurance contributions, with the DSS subsequently transferring the Serps-related part to the insurer.

In previous years, the Government added a generous incentive to persuade waverers to leave the state scheme. However, from April 1993 the incentive was reduced to 1 per cent, and is only available to people over 30. (This produces the striking kink in the graph reproduced here).

In 1996, the Government plans to change the arrangements for rebating national insurance contributions to an age-related basis. All the existing calculations about pivotal ages will have to be redone, and some people who are now moving back into Serps might find it better to opt out again. Getting a decent pension may depend on continuing vigilance.

(Photograph omitted)